Banks take a beating over eurozone fears

Fears that the eurozone’s financial crisis could derail the global economic recovery, along with rising tensions in Korea, sent shares and commodity prices tumbling yesterday.

The FTSE 100 index fell by 2.54 per cent, finishing below 5,000 for the first time since October last year, and wiped £33 billion from the value of Britain’s leading 100 companies. Banking stocks were among the heaviest fallers, with Lloyds Banking Group, Royal Bank of Scotland and Barclays all losing more than 5 per cent. There were similar reverses across Europe, with the Dax 30 in Frankfurt down 2.7 per cent and the CAC 40 in Paris 3.5 per cent. The Kospi in South Korea also fell by 2.75 per cent and the Nikkei in Japan by 3 per cent.

The Dow Jones industrial average dropped below the key 10,000 level. It and other US stock indices fell by more than 2 per cent in early trading to hit new lows for 2010.

On currency markets, the euro slid again to a near-nine-year low against the yen and close to last week’s four-year low against the dollar. Sterling dropped against both the greenback and the euro.

Commodities weakened, with the price of crude oil moving below $70 a barrel in New York, while copper prices fell by 4 per cent and lead, aluminium and zinc lost 5 per cent.

Traditional safe havens such as gold rose slightly, while German government bonds and British government gilts were also bought.

Analysts and traders said that while the situation in Korea was merely the latest excuse to sell, much of the downturn was being driven by a rise in short-term interbank rates — the price at which banks lend money to each other and a key measure of their trust. Three-month dollar Libor, the cost of borrowing in US dollars for three months, increased for the 11th consecutive day to 0.5365 per cent — its highest level since July last year.

Patrick Jacq, an analyst at the investment bank BNP Paribas, said: “It’s a run for dollar liquidity. Everyone wants to move out of the euro and wants dollars — so the problem is that access to dollar liquidity is strained.”

Bob Parker, vice-chairman of asset management at the investment bank Credit Suisse, said that fears over Europe’s banking sector had persisted after the ¤523 million (£450 million) rescue at the weekend of CajaSur, a Spanish bank. He said: “Concern is shifting to what writedowns banks are going to have to make, and to what extent there is a systemic problem in the Spanish savings bank system.”

In another sign that Spain has replaced Greece as the focus of concern, the premium demanded by investors to hold Spanish ten-year bonds instead of ten-year German bonds rose to its highest level since the European Commission and the International Monetary Fund agreed a ¤750 billion package for struggling eurozone countries.

Dominique Strauss-Kahn, managing director of the IMF, said that a sovereign debt crisis in Europe was now the biggest threat to the worldwide recovery.

Analysts believe that there could be more casualties among the Spanish savings banks, or cajas, which account for about half of the country’s domestic banking system. Other Spanish banks were caught up in the sell-off yesterday, with Banco Santander falling by 3 per cent. British banks are estimated to have outstanding loans of about £75 billion to Spanish borrowers, with Barclays the most exposed.

Germany added to the fears and announced that it could extend its ban on short-selling of certain securities to a wider range of assets.